What You Should Know About GST: A Quick Summary

GST explained

It has been hailed as India's 'biggest tax reform.' After months of political wheeling and dealing, the government has won a political consensus on the much awaited goods and services tax (GST) bill, which passed in the Rajya Sabha today. The GST will create a common market for over 1.25 billion people. Here's a refresher on what it is:

What is the GST?

It's a blanket indirect tax that will subsume several indirect state and federal taxes such as value added tax (VAT) and excise duty, and different state taxes, central surcharges, entertainment tax, luxury tax and a slew of related levies by local bodies.

The GST is likely to be at 18 per cent, and is widely expected to be implemented next year in April.

GST is a 'destination-based' tax, which means it's charged where goods are consumed, as opposed to where they are produced. Because it shifts the power that several Indian states have had in imposing indirect taxes on the production and movement, a centralised GST Council has been set up that will decide which taxes will fall in the purview of states and which can be subsumed into the GST. A dispute resolution mechanism will also be established to resolve any GST-related disputes.

What will become cheaper?

Expect many goods and purchases to become cheaper with the exception of fuel, liquor and tobacco. While several industries are expected to be beneficiaries, the entertainment industry may be a big winner as it will significantly bring down the 27 per cent entertainment tax. Here's how going to the movies will become cheaper: the central and state taxes come to about ₹66 on a ₹300 movie ticket. The tax could come down to about ₹46. Stocks of PVR cinema have shot up in recent weeks. Another beneficiary is the construction and building materials industry, which means the housing sector may also be a big winner with things like paints and cement becoming cheaper.

Why is it a big deal?

The GST is expected to add two per cent to the country's GDP, besides making the movement of goods easier across states. Because so far taxes have varied across states, often commercial trucks have had to go through multiple checkpoints to obtain the necessary permits and pay several taxes to the states they pass on their routes, which causes delays and encourages bribery. A uniform tax will make that movement of commercial products smoother.

GST's history and politics

The GST has been in the making for more than a decade. Congress originally mooted GST in 2006 and a constitution amendment bill was introduced in Lok Sabha in March 2011 but it lapsed with the dissolution of the 15th Lok Sabha.

The GST Bill was passed by the Lok Sabha in May 2015, but got stuck in the Rajya Sabha where BJP does not have a majority. The bill needs a nod from the two-thirds in both Houses of Parliament and will have to later ratified by 50 per cent of state legislatures.

The government had to address several concerns and agree to key amendments demanded from the opposing political parties on the key proposed provisions of the GST bill. One such amendment has been the scrapping of an additional one per cent tax, which was proposed earlier as a way to compensate states on any revenue losses. This would have resulted in a cascading tax and defeated the intent of a "destination-based" tax that is GST. The Modi government has also agreed to grant more powers to states for providing them full compensation for a period of five years, for revenue losses.

The opposition demand for the setting up of a dispute resolution mechanism as part of the GST council has also been agreed upon by the government.

What happens next?

However, with the passage of the GST Bill, the government will have to put up a mad scramble to put together all the mechanisms and state approvals in place to implement the GST by its rollout date of April 1, 2017.

Additionally, companies and tax collectors will have to be prepared on the necessary changes. Some companies may even have to overhaul their business processes to make way for the new tax change.